Workshop on
Deferred Taxation
Tahmeen Ahmad (ACA)
Understanding Deferred
Tax
An entity shall, with certain limited
exceptions, recognize a deferred tax
liability (asset) whenever recovery or
settlement of the carrying amount of the
asset or liability will make the future tax
payments larger (smaller) than they
would be if such recovery or settlement
were to have no tax consequences.
Understanding Deferred
Tax (contd.)
Accounting profit versus taxable profit
The temporary difference
Why calculate deferred tax assets or
liabilities?
The balance sheet liability method
Identifying temporary
differences
The carrying amount
The tax base of:
An asset-future tax deductible amounts
A liability- carrying amount less future tax deductible
amounts
Revenue received in advance- carrying amount less
any future non taxable amount
Two kinds of temporary differences : taxable
and deductible
Identifying temporary
differences (contd.)
B/s item Taxable Deductible
Temporary temporary
difference difference
Asset Carrying Tax base
amount greater greater than
than tax base carrying
amount
Liability Tax base Carrying
greater than amount greater
carrying than tax base
amount
Identifying temporary
differences (contd.)
Examples
Group A to identify tax base and carrying
amount
Group B to identify taxable temporary
differences
Group C to identify deductible temporary
differences
Recognition criteria DTL
“Deferred tax liability shall be recognized on all taxable
temporary differences except to the extent that it arises
from
Initial recognition of Goodwill
Initial recognition of an asset or liability in a transaction that :
Is not a Business combination; and
At the time of the transaction, affects neither accounting nor
taxable profit (tax loss)
However, for taxable temporary differences associated
with investment in subsidiaries, branches, associates
and interests in joint ventures, a deferred tax liability
shall be recognized with exceptions.”
Recognition criteria DTA
“a deferred tax asset shall be recognized for all
deductible temporary differences to the extent that it is
probable that taxable profit will be available against
which the deductible temporary difference can be
utilized, unless the deferred tax asset arises from the
initial recognition of an asset or liability in a transaction
that:
Is not a business combination
At the time of the transaction affects neither accounting profit
not taxable profit (tax loss)
However for deductible temporary differences
associated with investment in subsidiaries, associates,
branches and interests in joint ventures, a deferred tax
asset shall be recognized subject to conditions
Specific guidance on
Deferred tax Recognition
Goodwill
business combinations
Assets at fair value
Initial recognition of assets and liabilities
Share based payments
I. Goodwill
Initial recognition –deferred tax not
recognized as goodwill is a residual
Subsequent reductions in unrecognized
DTL that arose from the initial recognition
of goodwill- deferred tax liability not
recognized
Subsequent tax allowable differences –
deferred tax liability recognized
II. Business combinations
Identifiable assets and liabilities are valued at fair value
at acquisition date
Tax base may be different
Temporary differences arise
Deferred tax calculated and corresponding effect
adjusted in goodwill or negative goodwill*
Case : Acquirer’s own deferred tax asset not
recognized in a business combination due to
unavailable taxable profits
Case: Acquiree’s deferred tax asset not recognized
due to non satisfaction of separate recognition criteria
III. Assets at fair value
Revaluations as per IASs
Different tax base and carrying amount
Temporary difference arises and a
deferred tax asset/ liability is calculated
IV. Initial recognition of
assets/ liabilities
where tax base is different carrying amount at initial
recognition, temporary differences arise
Deferred tax asset/ liability recognized with:
Adjustment in goodwill (Part of a business combination)
Recognition of deferred tax expense/ income( where the
transaction affects profits)
Adjustment to equity (for transactions that affect equity)
Deferred tax asset/liability not recognized if the
transaction is not a business combination or does not
affect accounting or tax profits.
V. Investment in
subsidiaries etc
When carrying amount of investment in subsidiaries, branches
and associates or interests in joint ventures differs from tax base
Reason for difference include:
Undistributed profits
Change in forex rates
Impairment
The DTL recognized for taxable temporary differences except
where the parent can control the timing of reversal and
the differences are not probable to reverse in the foreseeable future
The DTA recognized for all deductible temporary differences
where:
The differences are probable to reverse in the foreseeable future
Taxable profit will be available against which the temporary difference
can be utilized.
VI. Share based payments
Timing of expense allowed in case of
share based payments may differ
Employee remuneration in share options
Tax authorities normally may allow
deduction at a different date eg of actual
exercise of share rights
Deductible temporary difference arises
on which deferred tax is recognized
Applicable rates and
measurement
Rate applicable in the period the differences
are expected to reverse
Average rate applied in case of slab rates
Rate depends on intended manner of recovery
or settlement of the asset or liability
Tax rate may depend on dividend payout.
(higher for non distribution) deferred tax
computed at ‘undistributed profit’ rate
DTL and DTA not discounted
DTA reviewed at each B/s date*
Items credited or charged
directly to equity
Deferred tax will be charged or credited directly
to equity if the tax relates to items that are
credited or charged, in the same or different
period, directly to equity.
Examples are on:
Revaluation surplus
Adjustment to the opening balance of retained
earnings
Forex differences on translation of foreign
operation’f f/s
Unrecognized deferred tax
assets
Reassessed at each b/s date
Recognized to the extent it is probable
that future taxable profits will be available
Presentation and
disclosure
Offsetting of deferred tax assets and liabilities allowed
under certain conditions
Tax expense in income statement
Disclosures of:
Components of tax expense
Aggregate deferred tax on items charged to equity
Reconciliation of tax expense (income) with accounting profit
Unrecognized deferred tax assets- amount of deductible
differences
Changes in tax rates from previous period explained
Amt and expiry date of deductible temporary differences, unused
tax losses and tax credits for which no deferred tax asset has
been recognized
Aggregate amount of temp diff related to inv in subs etc for which
no deferred tax liabilities have been recognized
Presentation and
disclosure (contd.)
For each type of temporary difference (and unused tax
loss and tax credit):
DTL & DTA in b/s
DTI and DTE in income statement
For DTA, supporting evidence for recognition when:
The utilization of the DTA will exceed the available taxable
temporary differences in the period of reversal
Losses suffered in the current or prior period to DTA
Potential income tax consequences of payment of
dividends to shareholders
Illustrations
Group C to work out deferred tax assets
and liabilities
Group B to present the f/s portions as
relevant
Group A to prepare the reconciliations
